Disability Insurance

According to statistics from the Department of Labor, there is a 20% chance you will become physically or mentally disabled between the ages of 20 and 60. Clearly, as a result of this disability, your income may be affected either partially or fully. Having a disability insurance is therefore, very important. Unfortunately, you cannot purchase this insurance if you are not employed because there is no income to insure (insurable interest). There are two types of disability insurance available; short term disability and long term disability. ...Show details

Typically, short term disability insurance provides 80-100% wage replacement for a short illness lasting 3 to 6 months. The insurer starts to pay benefits after a short period of disability, sometimes as early 8 days after the onset of a disability.  For illnesses longer than 6 months, you need long term disability coverage. Long term disability may provide up to 70-80% of wage replacement. This type of coverage typically covers you until you reach retirement age. In general, these policies start paying benefits after 180 consecutive days of disability.

Be careful about the definition of disability: ...Show details

  1. Any Occupation: A policy with this type of coverage provides benefits only when the person insured cannot work in any occupation. This is good for individuals who make modest incomes and perform manual labor. This type of coverage is meaningless for people with specialized skills e.g. doctors, engineers, lawyers, professional athletes or those earning high wages. Given the modest wage replacement in this case, such insurance is generally very inexpensive.
  2. Own Occupation: In this scenario, the policy pays when the insured can no longer perform his/her current occupation. As a result, this insurance is more expensive. It is very useful for those individuals who earn substantial incomes and are in a specialized profession e.g. doctors.

Disability Insurance Coverage Types

There are two main types of disability coverage:

  1. Accidental Bodily Injury: This coverage refers to physical injury sustained as a result of an intentional act. An example of what this insurance would cover: say a co-worker intentionally drops a computer on the insured's feet leading to the disability of the insured person.
  2. Bodily injury with accidental means: You can also think of it as an accidental injury from accidental means i.e. it does not cover accidental injuries caused by someone with malice. ...Show details

Apart from disability insurance, some workers may be covered by Workers' Compensation which provides eligible employees with coverage for work-related injuries and illnesses in accordance with applicable state laws. Workers' Compensation benefits include coverage for medical expenses and, in certain instances, income replacement for time lost from work. Eligibility and benefits vary according to state law. If you experience a work-related injury or illness that extends beyond 180 consecutive days, you may also be eligible to apply for long-term disability benefits through the Social Security Administration. Although Social Security may also provide disability benefits, it requires a 5 month wait after the onset of disability.  You also must prove that you can not engage in any gainful employment and prove that the disability is expected to be at least 12 months or is terminal.

Disability Insurance Coverage Amount

Coverage amounts are a percentage of your base salary. If you are employed, you need to find out if, and how much, insurance is already provided by your employer. Consider the tradeoff between the amount of the disability insurance taken and the premium to be paid. In general people protect at least 80% of their income for long term disability. Note that disability insurance cannot cover 100% of your salary due to adverse selection (people intentionally getting disabled and getting a steady stream of salary for many years).

Action Plan

  • Assess your disability insurance needs
  • Get the quotes from a few different providers (see the list below)
  • Carefully read any 'exclusions' and 'limitations' on the policy
  • Most policies come with a free-look period to let you review terms of the policies. During this period
    • if you decide to cancel your policy, you get your money back.
  • Premium wise there are 3 types of disability insurance plans: ...Show details
    • Conditionally renewable – this is the most restrictive policy where premiums can go up and your coverage can potentially be canceled in the event any conditions stated in the policy are triggered.
    • Guaranteed renewable – in this case, insurance company can raise premiums so long as the change affects an entire category of policy holders, or all policy holders in a given occupation.
    • Non Cancelable – this policy favors the policy holder most. Here, the premium is fixed over the term of the policy and the insurance company can not increase the rates, decrease your benefits, cancel or refuse to renew the policy.
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